Tax the Church?

There are periodic calls for the government to tax the church. And the church would reply that the government can’t tax it, because their tax-exempt status is guaranteed in the Constitution and the Internal Revenue Code. If we look at the Constitution and actual practice, however, the case is not so simple. The Church is not as tax exempt as they make themselves out to be. They actually pay a lot of taxes: dividends tax,  employee contributions, VAT. But at the same time, there is a lot in terms of property and business taxes that the church should pay, but doesn’t.

Real Estate Tax Exemption
The constitution mentions church tax exemption in Article 6, Section 28(2):
“Charitable institutions, churches and personages or convents appurtenant thereto, mosques, non-profit cemeteries, and all land, buildings, and improvements, actually, directly, and exclusively used for religious, charitable, or educational purposes shall be exempt for taxation.”

Thus, it is clear: church buildings are exempt from real estate tax. Note that this doesn’t refer to “the church” as an institution, or its constituent dioceses, parishes and congregations, which are entities that are much more than mere buildings. If we go by the above provision, other church property should be taxed if they are not ‘exclusively’ used for religious purposes. Convents, for example, are subject to property tax. School buildings with a dual purpose – as residence for priests/nuns and as school, since this is no longer ‘exclusive use’ should also be taxed.

The presence of a chapel in a convent does not make the convent a religious building; it is just an ordinary residence with a chapel. It is similar to a chapel in a mall – the mall remains a commercial building.

Schools and Hospitals
There is a constitutional provision covering non-stock, non-profit schools. This is found in Article 14, Section 4.
“(3) All revenues and assets of non-stock, non-profit educational institutions used actually, directly, or exclusively for educational purposes shall be exempt from tax and duties…”

“(4) Subject to conditions prescribed by laws all grants, endowments, donations or contributions used actually, directly and exclusively for educational purposes shall be exempt from tax.”

Under this provision, all income raised by a non-stock, non-profit school should be used for educational purposes. Withdrawals from school funds for use by congregations should be prohibited. If they did this, the school should be stripped of its tax free status; or the congregation should be charged with (technical) theft of the school’s assets.

You would then say: “the school could simply pay the nuns/religious who have school-related functions, and they could donate this to their congregation. True. Actually, this is what they should do. But the salaries of these nuns/religious should be comparable that of to the other teachers or administrative staff in the school. Paying them higher salaries would constitute a ‘withdrawal’ of profits by the congregation, which should not be allowed for a non-profit, non-stock educational institution.

Note that ‘non-profit, non-stock’ covers also schools that are run by private foundations. It would not be right for the head of the foundation running a school to build his residence on school premises, and then get paid a very high salary. So, why should a church congregation be any different?

Then, there is the case of hospitals. Are hospitals included in the term ‘charitable institution’?   For me, charitable institutions would include orphanages, battered women shelters and the like; but hospitals are at best a border line case. There should be clear guidelines made by the Department of Finance to define when a hospital can be classified as a charitable institution. Perhaps it should require that the majority of its patients are poor and that they pay below market-based hospital fees.

It should not be the case that any religious group could simply put up a hospital, run it in a regular manner, collect high fees from patients, and then claim to be a ‘charitable institution’ exempt from real estate and income taxes.

Political Clout
But in the Philippines today, church run institutions often get away with not paying taxes. Mostly, this is due to the church’s political clout; most politicians are afraid of going after the church for back taxes. And there is also the bias in favor of the church by judges. In a recent case filed by the Cebu City government against Perpetual Succour Hospital (run by religious nuns), the city wanted to collect taxes on the pharmacy and real estate leasing operations done by the hospital, because these are not covered by the tax exempt status of the hospital. But the Regional Trial Court ruled that the accounts for these activities are not separate from that of the hospital, and thus no tax could be collected. Actually, if we were to follow the Constitution, it should be the other way around: since the hospital is no longer exclusively used for ‘charitable purposes’, it should be taxed as a whole.

The government, through the Department of Finance,  could and should implement the law when it comes to the income and assets of religious institutions.  The church should not be allowed a creative  interpretation of the tax laws to make themselves tax-exempt. This is especially so when they operate as non-profit and non-stock institutions. There may be some laws that need to be amended, but mostly it is just a question of political will. If the Department of Finance decides to go after the church for back taxes, they will have the Constitution and most of the laws on their side.

I believe it is high time that the government fully collect the taxes due from dioceses, congregations and the like. We should not continue with the myth that the church as a whole is tax exempt. This is effectively tax evasion by the church, and in the present framework of pushing for full tax compliance by everyone, the church should not be an exception. Otherwise, that will be the same as condoning corruption (in this case, tax evasion), and we don’t want that to happen. Or do we?

Abolish the Capital Gains Tax

The tax system in the Philippines is quite complicated. And the capital gains tax is one of the most complicated part of it. While people are required to pay a capital gains tax,  the procedure for paying such a tax is quite complicated, and they will be terribly complicated for anyone who is active in the market for stocks, bonds and other financial instruments.

I suggest that we simplify this part of the tax system, while retaining the level of tax income of the government. And this is simple: abolish the capital gains tax. In its place, the government could simply impose a wealth tax. This will simplify the administration of the tax, and encourage investments in Philippine financial instruments.  And this will also close a lot of practical loopholes in the implementation of the law.
[The Netherland’s government implemented such a tax on wealth in 2001, and it has simplified the collection of taxes.]

Simple
A capital gains tax involves the taxpayer providing documents proving the initial price of land or a financial product, and then also documentation on the price this piece of land or financial product was sold.  And, if these products were sold at a loss, this would be able to offset tax due for sales that resulted in a profit.

This is not only tedious, but it would be difficult of the tax authorities to check. And, when it comes to land, the documentation to prove the price a land was bought is extra difficult because a lot of land is simply inherited.

On the other hand, a wealth tax is simple.  The basis would be something like a statement of assets and liabilities. And then, a tax (for example, at a rate of 1%) of wealth (which is the net of assets minus liabilities) would be imposed. Land will be valued at its declared value at the end of the year; but the owner should be careful not to under-declare the value, because thie declared value would be the basis for government buying this piece of property, and also serve as the basis for banks counting it as collateral for loans.

Specifics
Let us now describe our proposal in more detail:

• the tax on capital gains is abolished.
• the wealth tax will be 1% of declared wealth; the first Php 1 million of wealth is exempted from this tax. The tax includes all wealth: land and other real estate; bank deposits, stocks. Deducted from the taxable wealth would be loans owed.
• the value of land and other real estate will be its zonal value
• the value of shares of stock will be their market value at the end of the year.
• the tax on dividends and interest will be withheld at the rate of 10% at the source (i.e. by the company or bank); those who file for wealth tax could deduct the tax collected from the amount due in wealth tax. Thus, foreigners who receive interest income or dividends pay the tax; residents end up not paying tax.

People who have previously paid the wealth tax, but have not filed their tax for a given year will be assessed by the BIR for the wealth tax at 110% of their previous wealth (thus, assuming that their wealth increased by 10%).

The declaration for the wealth tax will be submitted at the same time as the income tax.

Increased Tax Compliance
One thing about wealth, is that it is relatively constant. So, a given taxpayer would be paying generally the same amount every year, increasing gradually every year.  And, since the wealth tax would replace the tax on dividends and on interest income, there will be no need for the BIR to monitor these, since they will be automatically collected. It will be the taxpayer who will declare their interest and dividends, since they want to use the tax withheld to offset the tax on their other assets.

The government would not even need to find out exactly how much money people have in bank accounts.  Tax will be withheld from them anyway; and  if the depositor does not declare their bank balance, then they will not be able to get part of the withheld tax back – it’s his problem.

The advantage of a wealth tax is that all wealth of citizens will be taxable. Thus, theoretically, also the wealth in the form of foreign bank deposits. And, Swiss bankers (for example) are amenable to withholding tax from their foreign depositors, on the condition that their identities are not revealed. This means that the Philippine authorities can collect taxes even from “secret” Swiss bank accounts (even without knowing whose accounts these are).

If, for any reason, a person’s wealth is less than the previous year’s, then they should prove this by showing documentation.

No New Taxes?

Noynoy Aquino promised, during a speech before the Makati Business Club on 21 January 2010 that he will not raise taxes as president.  This is a nice promise, but unfortunately, I don’t think that Aquino, nor any president for that matter, could possibly keep such a promise.

Congress
In the first place, it is Congress that decides to raise taxes, and not the president or the executive branch. When the Congress deliberates on the budget, they also deal with taxes (usually small ones); the budget is such a complicated and involved bill that when they agree on it, it is the result of such a long process of deliberation and compromises. When the budget comes to the president for signing, and it  has a few tax increases, it will be extremely difficult not to sign. Not signing may mean that the budget has to be deliberated on again, and that the first few months of the following year would be without a new budget, etc. Thus, the president may really have to sign such a budget.

Adjustments
Then, there are the adjustments made to taxes on a regular basis. For example, some excise taxes are regularly adjusted to go with inflation. Thus, an excise tax on say alcohol, will have to be updated if the price of alcoholic beverages rise. Or, in the course of negotiations with other countries, it may be necessary to change some taxes from excise to ad valorem (excise is a specific amount in pesos per unit to be taxed, will an ad valorem tax is based on the price of the unit to be taxed) or vice-versa, or to raise some taxes and lower others. When this happens, the overall tax burden may remain the same, but specific individuals may experience an increase in their taxes, while others experience a decrease.

Also, if the national government decides to cut down on subsidies for some services at the local level, this may push the LGUs to raise some of their own taxes to recoup the added expense. In a sense, the national government raised local taxes.

Overall impact
Of course, if the “no new taxes” promise is taken to mean: “I will not increase the overall tax burden.” this become more feasible. This means that increases in some taxes will be offset by decreases in others, so that the overall effect will be the zero. This means that the government will seek other ways to generate money – e.g. through more economic growth – than taxing the people.

The idea behind Aquino’s no-new-taxes policy is that enough money could be raised through efficiency in government and tax-collection. And though this is a good idea; it’s just not an absolute thing. I don’t believe it is a good idea to tie down the president to a “no new taxes” policy, since taxes are inevitably part of the arsenal of instruments open to the president.   If good government requires that some taxes go up, then so be it. Just make sure that it is done fairly and that it really is the last resort.